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Mindteck India: Lacklustre financial performance

Jan 10, 2014

A company which seems to be completely at odds with itself

A bellwether stock of another kind

This is a not a company that many investors have heard of. Not that it makes any difference as matters currently stand. It is a 22 year young company, and as the name suggests, it is an IT unit operating out of Bangalore with an onshore branch in Kolkata and two offshore offices in the US and in Singapore respectively. Mindteck India Ltd was originally incorporated as Hinditron Informatics Ltd in 1991 in Mumbai, and after undergoing a name change it subsequently shifted the HQ to Bangalore in 2006.

The company's core business focus remains in product engineering, information technology services, and talent acquisition and management services. But for classification purposes the revenues are divided into income from Software services and income from IT enabled services. The former is a substantially bigger revenue generator than the latter. For the 12 month period ended March 2013, the standalone company generated revenues from operations of Rs 580 m while the consolidated entity generated revenues of Rs 2.6 bn. The revenue accretals exclude 'other income' of Rs 3.9 m and Rs 14.5 m respectively. The revenues of the standalone company include export earnings of Rs 564 m-or 97% of all revenues from operations.

An offbeat enterprise if one ever existed

It is a bit of an offbeat enterprise or something. The board of directors comprise of four members and three of them are non executive independent directors. The only whole time director is the recently appointed managing director, Yusuf Lanewala. The present individual ownership if any in the company is not readily known. It boasts a paid up capital of Rs 249 m and the principle promoter shareholder is Embtech Holdings Ltd, Mauritius, with a stake holding of 64.85%. In reality there is an ultimate holding company going by the name Transcompany Ltd located in the British Virgin Islands. In all there are some seven holding companies which include five intermediate holding companies and one sibling of an intermediate holding company. Why has it resorted to such a complex holding pattern please? Given the pyramidical holding structure one would think Mindteck is mining the most exotic mineral on mother earth or something. No such luck though. It has difficulty standing on its legs unaided.

The next biggest shareholder is another corporate (not listed as a promoter shareholder) Banco Efisa S.A., a company incorporated in Portugal or some such and which holds another 10.94%. That would make for a controlling stake in excess of 75%, and it also leaves for very little floating stock to be traded in the Indian bourses. The company also has 'share application moneys pending allotment' of Rs 7.5 m against Rs 12.3 m previously. The reserves and surplus relative to the paid up capital is sumptuous -make no doubt about it-at Rs 1.20 bn. But the catch here is that the securities premium reserves alone in this total amounts to Rs 988 m. So the lustre is completely lost sort of.

The several siblings

It also makes do with six siblings and its combined stake in them amounts to Rs 1.23 bn. The company also boasts of two step down siblings based out of Germany and the Netherlands. The siblings are all offshore based-Bahrain, Malaysia, Singapore, UK and the USA and they are also 100% owned. The largest holding by far is in the US venture with an investment book value of Rs 931 m. The next biggest outlay is in a US dollar denominated Investment Company called Chendle Holdings also based in the US with a book value of Rs 196 m, and followed in third place by the Singapore sibling with an investment value of Rs 85 m. The shares in the American sibling were acquired for an average price of Rs71,658 per share on a par value of USD 1 per share. The paid up capital of Chendle Holdings consisting of all of 2 shares were acquired at an average price of Rs 97,709,995 per share on a face value of USD 1 per share. One does not know on what basis the company arrived at this eye popping per share acquisition price. But this is the reality of the matter. Not that Mindteck is any the better or worse for it at the end of the day. The shares in the Singapore sibling were acquired at a more sedentary price of Rs 64.60 per share on a face value of SGD 1 per share. The book value of its portfolio investment is the single biggest entry by far on the asset side of the balance sheet. The next biggest item is trade receivables which is way below at Rs 126 m.

The standalone company on revenues including other income of Rs 584 m (software services income of Rs 531 m and IT enables services income of Rs 49 m) against Rs 564 m previously, the company earned a pre-tax profit of Rs 33 m against Rs 16 m previously. After tax provision, the net post tax profit amounted to Rs 17.8 m against Rs 7.4 m previously. Needless to add the EPS is not worth mentioning here. In other words, on marginally higher revenues the company managed a more than 100% increase in pre-tax profit. Employee costs rose 8%, but it put a brake on the other big revenue expense item-'other expenses'. Remarkably enough the company slashed such expense items under this head as marketing costs-NIL against Rs 11.7 m previously, travel costs, and a more than 60% drop in forex losses to Rs 12 m.

But the company was still cash strapped of the day. Higher book profits do not translate into higher cash generation-not by a mile. The company generated negative cash of Rs 20 m from operations against a negative cash flow of Rs 1.5 m previously. With capex costs to be paid for, it was out of pocket for another Rs 7 m here. Consequently, it wound up borrowing moneys to the tune of Rs 31 m against a ZERO debt previously. Wisely enough the company did not recommend any dividend.

One possible reason for the difficulty in generating sufficient cash could be the lack of any direct inflow from its rather large portfolio investment outlay. There is no explanation forthcoming for this anomaly.

The operations of the siblings

What we do know is that Mindteck is a 100% EOU (export oriented undertaking) in a manner of speaking - as 97% of its revenues from operations accrue from sales made to offshore siblings. That is to say that exports realised revenues of Rs 563 m -all of it affected through its siblings. The biggest share is garnered by MindtecK USA with sales of Rs 488 m. Next in the pecking order is Mindteck UK Ltd with sales of Rs 73 m. There are three other beneficiary siblings too - but their takings are anaemic. There are other revenue interactions with it siblings such as reimbursement of expenses incurred on behalf of siblings, and the ulta reimbursement to the siblings for expenses incurred by them on behalf of the parent.

It experiences other difficulties too in generating more cash from operations given the manner of working of IT companies. The company has perforce to give large dollops of credit to push sales-that is how the industry functions. But on the flip side it cannot defer paying creditors as the largest expense by far is employee costs (Rs 364 m) and these expenses are of a statutory nature. Hence there is a large gap between the year-end figures of trade receivables (Rs 101 m) and trade payables (Rs 26 m) and this aspect reduces the company's ability to generate cash resources as the current assets at Rs 166 m (including dosh of Rs 30 m) are far higher than the current liabilities of Rs 75 m. Such mismatches were what led to the company having to borrow monies during the year.

This mismatch is nothing compared to the mess that encompasses its siblings. The company has provided the brief financials of the working results of eight siblings of several hues as required under law. In revenue terms the largest sibling by far is Mindteck Inc based out of the States. On a middling capital base of Rs 0.82 m the company has negative reserves of Rs 194 m. It is another way of saying that the net worth is fully eroded. (Why has the parent not provided for the depreciation of its investment in Mindteck Inc in its books?) But it simultaneously managed the feat of engineering revenues of Rs 2.2 bn, but sad to say it resulted in a pre-tax loss of Rs 9.4m. As I had mentioned earlier Mindteck Inc bought software servicesof Rs 488 m from the parent. What value addition it was able to realise on resale is not known, but the results do speak for itself. Apparently this company also creates software services of its own and sells it. But how the company managed the supreme feat of generating such gargantuan revenues on a puny owned capital base and a negative net worth at that is beyond me. The next biggest offspring turnover wise is the Singapore based offspring. The working results here too are an absolute mishmash. It generated revenues of Rs 209 m and but landed up with a pre-tax loss of Rs 4.7 m. This company on an issued capital base of Rs 38 boastsnegative reserves and surplus.

The curious case of Chendle Holdings

The only other sibling of some consequence is Mindteck UK. This company too is another washout. On an issued capital base of Rs 77 m it has negative reserves of Rs 72 m. But during the year it generated revenues of Rs 198 m and made a pre-tax of Rs 8 m. So this company may be on the mend-at least let us hope so. The other siblings are neither here nor there outfits especially Chendle Holdings which boasts the second largest investment outlay by Mindteck in its siblings. This worthy is comfortable ensconced in the salubrious climes of the British Virgin Islands. Chendle is indeed a whacko company by all accounts. It has shown its paid up share capital as ZERO when that is not the reality. This just does not add up. In any case it has NIL revenues and NIL profit and loss-just about NIL everything.

It is difficult to understand what the message if any is it that the company is trying to pan out to its target publics.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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